Question

Beale Manufacturing Company has a beta of 1.4, and Foley Industries has a beta of 0.60. The required return on an index fund that holds the entire stock market is 14%. The risk-free rate of interest is 4.5%. By how much does Beale's required return exceed Foley's required return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Beale Manufacturing Company:

Required Return on Stock = Risk-Free Return + (Market Risk Premium) (Stock’s Beta)

Required Return on Stock = 4.5% + (14% - 4.5%) (1.4)

Required Return on Stock = 17.80%

Foley Industries:

Required Return on Stock = 4.5% + (14% - 4.5%) (0.60)

Required Return on Stock = 10.20%

Beale’s exceeds Foley by:

= 17.80% - 10.20%

= 7.60%